Ontario’s Renewable Energy Sector
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Ontario’s renewable energy sector seeing a boost amid progressive legislation, still tainted with market uncertainty
By Justin Yan
Renewable Energy Finance Forum
In a strong sign for Ontario's green economy, over 260 representatives from industry, government and finance congregated in Toronto this month to talk about Canada's new frontier: renewable energy.
Hosted by Euromoney, an institutional investor based out of London, England, the Canadian iteration of the Renewable Energy Finance Forum was in full swing in early April. As part of Euromoney Energy Events worldwide, REFF sessions are hosted in major cities including London, New York (its largest attracting over 700 attendees last year) as well as in emerging markets such as China, India and South America.
In its second year, REFF Canada has gained considerable traction since its timely inaugural session following the passing of the landmark Green Energy and Economy Act in May 2009, the product of the province's effort to phase out its coal-fired generating facilities by 2014.
“With that single piece of legislation, Ontario became the most forward-looking government in the world with regard to renewable energy, actively forcing development and deployment of it at scale,” says Paul Clark, Conference Manager of REFF Canada.
Indeed, the legislative push by the Ontario government has transformed the province's investment environment into a more competitive market internationally. As projects begin to be constructed and brought online, interest is beginning to ramp up from investors. The conference attracted 63 per cent more attendees compared to last year's 160 and is seeing burgeoning interest in Canada as well as from abroad.
At the center of attention is Ontario's comprehensive feed-in-tariff (FIT) program, a subsidy essentially guaranteeing significant returns on investment for operational renewable energy projects. Operated by the Ontario Power Authority (OPA), the FIT program is designed to contract out the development of renewable energy capacity while encouraging the creation of “green” jobs and technology in Ontario through domestic content requirements.
Available but cautious capital
As the Green Energy and Economy Act sees its first year and a half since being signed into law, clean energy companies and financiers eager to cash in on the massive growth opportunities are cautiously optimistic.
According to Clark, the big five Canadian banks have increased their presence at REFF, a telling sign for the nascent sector. This is an important step as large investors are key to establishing commercially viable projects at scale and setting precedents for the rest of the industry to follow, he explains.
In recent years, Clark has observed a shift in mentality among large investors with regard to renewable energy. In particular, he points to the growing and evolving renewable and clean energy departments in major banks. Institutional investors, he says, are beginning to deploy capital in this space and investing in assets. “Renewable energy has become an asset class of its own,” he says.
Moreover, the renewable energy sector is becoming more popular globally, he says, citing large deals such as Royal Dutch Shell's foray into ethanol in a joint venture with Cosan in Brazil. However, he cautions that there is still a lot of uncertainty in the market.
Market uncertainty is one of the top challenges for the development of the renewable energy sector in Ontario, says Kristyn Annis, a lawyer specializing in renewable energy with McCarthy Tétrault.
Annis, who advises banking clients on the sector, argues that Ontario's market is hampered by political influence which takes away from the stability that it needs. “I think that lenders and developers can deal with different economic climates but I think one of the hardest things for them to deal with is uncertainty”, she says.
Government Support
In addition to financial backing of large-scale projects, the viability of the renewable energy sector is dependent upon active government support, says Clark. However, support for renewable energy globally has been in a state of flux, he says, referring to a recent slashing of FIT programs for solar projects in Spain. This has cast a long shadow over the entire sector.
The roots of investor uncertainty are not only framed locally, but are shaped globally as well. Governments worldwide are revisiting subsidies for renewable energy, including in Italy, Spain and Germany. In the United States, Clark argues that the momentum for renewable energy has dissipated since the Obama administration first came into power heralding a new era for green energy. The American loan guarantee program and tax breaks have been successful, he says, but the looming question is what's next?
“In Canada, different provinces are forcing renewable energy in very different ways. I think if other provinces follow the example of Ontario, it's entirely possible Canada becomes the number one destination for renewable energy capital in the world”, says Clark.
That being said, he argues that the Ontario government needs to maintain its level of support for the renewable energy sector to take off. “It needs to continue to remain attractive as an asset class for the investors”, he explains.
Ontario's FIT program has not been without its fair share of challenges, which has caused a slump in confidence in Ontario's regime among the investor community.
Confidence has waned in the stability of the Ontario regime due to a number of recent changes to the FIT program and ongoing delays plaguing the project approval process, according to a member of a Toronto-based private capital fund at the conference.
As at March 18, 2011, the total number of applications reported by the OPA stood at 5,229 with only 1,226 contracts executed, meaning only 2,583 MWs of capacity has been approved out of the 16,891 MWs in the application queue.
The OPA caused a stir when it announced a 20 per cent rate reduction for ground-mount solar photovoltaic projects under the micro-FIT program – tailored for installations producing less than 10 kWs. Colin Andersen, CEO of the OPA, stated last fall that the rate reduction reflects the lower costs of installing ground-mount solar projects compared to rooftop installations and that rates remained competitive. The rate reduction resulted in a drop of over 75 per cent in ground-mount applications between last June and July, figures showed. This has investors concerned over potential rate changes in the future.
A consequence of its own success, the large number of uptakes in the FIT and MicroFIT programs has also led to bottlenecks in projects coming online as the power utility works to upgrade transmission systems to accommodate the number of additional connections.
Adding pressure from the international stage, the domestic content provisions of the FIT program are being formally challenged by Japan, the United States and the European Union under a World Trade Organization complaint citing protectionism which has yet to be resolved.
Yet despite its challenges, Clark believes that Ontario is a prime example of a government offering great support and healthy returns for investors. As it slowly works to tweak its programs and iron out the creases, the OPA is readily drawing lessons from the program's short time in operation, something lenders as well as developers can look forward to.
Ontario's FIT program has so far been successful in garnering interest from domestic and international capital. With a looming provincial election, its next challenge will be to sustain it.
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